Hershey Co. (NYSE:HSY)

The period under review demonstrates a generally positive trend in economic profit, alongside fluctuations in the underlying components. Net operating profit after taxes (NOPAT), cost of capital, and invested capital all exhibit distinct patterns over the five-year span.

Net Operating Profit After Taxes (NOPAT)

NOPAT experienced a decrease from 2018 to 2019, followed by consistent increases through 2022. The value rose from US$1,303,042 thousand in 2018 to US$1,821,868 thousand in 2022, representing a substantial overall growth despite the initial dip. This suggests improving operational efficiency or increased revenue generation over the latter portion of the period.

Cost of Capital

The cost of capital showed an initial increase from 8.27% in 2018 to 8.61% in 2019. It then decreased slightly in 2020 to 8.42%, before rising again to 8.83% in 2022. These fluctuations may reflect changes in market interest rates, risk premiums, or the company’s capital structure. The overall trend indicates a moderate increase in the cost of funding over the five years.

Invested Capital

Invested capital consistently increased throughout the period, rising from US$6,545,593 thousand in 2018 to US$8,759,552 thousand in 2022. This growth suggests ongoing investment in assets and operations, potentially driving the observed increases in NOPAT. The rate of increase was particularly pronounced between 2019 and 2021.

Economic Profit

Economic profit, the primary metric of value creation, generally increased over the period. It decreased from US$761,721 thousand in 2018 to US$666,514 thousand in 2019, mirroring the NOPAT decline. However, it then rose steadily, reaching US$1,048,669 thousand in 2022. This positive trend indicates that the company is generating returns exceeding its cost of capital, and that value creation is improving. The largest year-over-year increase occurred between 2021 and 2022.

In summary, while initial years showed some volatility, the overall performance indicates a strengthening financial position with increasing economic profit driven by growth in NOPAT and invested capital. The moderate increase in the cost of capital is a factor to monitor, but has not offset the gains in economic profit.

Net income attributable to The Hershey Company

Over the five-year period, net income exhibited a generally upward trend. Starting at approximately 1.18 billion US dollars in 2018, it experienced a slight decline in 2019 to about 1.15 billion US dollars. However, the subsequent years show consistent growth, with net income increasing to roughly 1.28 billion in 2020, then to approximately 1.48 billion in 2021, and reaching about 1.64 billion by 2022. This reflects a steady improvement in profitability over the latter part of the period.

Net operating profit after taxes (NOPAT)

NOPAT followed a trend similar to that of net income, beginning at around 1.30 billion US dollars in 2018. There was a dip in 2019 to approximately 1.24 billion, followed by a continuous increase in the following years. In 2020, NOPAT rose to about 1.43 billion, then to roughly 1.60 billion in 2021, and further up to approximately 1.82 billion by 2022. The growth trajectory suggests improvements in operating efficiency and tax management resulting in higher operating profitability.

Overall insights

Both net income and NOPAT demonstrate resilience and growth after a modest decline in 2019. The upward trends from 2020 to 2022 indicate enhanced financial performance, with operating profits expanding at a slightly faster pace compared to net income. This may signify effective operational strategies and favorable market conditions contributing to increased earnings and operational efficiency.

The analysis of the annual financial data reveals distinct trends in the company's tax-related expenses over the five-year period ending December 31, 2022.

Provision for Income Taxes

The provision for income taxes exhibited fluctuations, starting at $239,010 thousand in 2018, then slightly decreasing to $234,032 thousand in 2019, followed by a further decline to $219,584 thousand in 2020. In 2021, there was a sharp increase to $314,405 thousand, representing the highest value in the observed timeframe. This increase, however, moderated in 2022, with the provision decreasing to $272,254 thousand, remaining higher than the values prior to 2021 but lower than the 2021 peak.

Cash Operating Taxes

Cash operating taxes demonstrated a similar pattern. Starting at $233,444 thousand in 2018, these taxes increased notably to $281,073 thousand in 2019, then declined to $225,816 thousand in 2020. A significant rise occurred in 2021, reaching $330,049 thousand, which was the highest during the period. This trend reversed in 2022 with a decrease to $266,447 thousand, yet the value was still above the amounts recorded for 2018 and 2020.

Overall, both provision for income taxes and cash operating taxes show a comparable trajectory with a moderate decline up to 2020, followed by a pronounced increase in 2021, and a partial reduction in 2022. The peak in 2021 for both items suggests either increased taxable income or changes in tax rates or policies impacting the tax expenses distinctly during that year. The reduction in 2022 indicates some relief but still reflects a relatively higher tax burden than in the years prior to 2021.

The financial data reveals several key trends over the five-year period ending in 2022. There is a general increase in total reported debt and leases, equity, and invested capital, which provides insight into the company's capital structure evolution and growth dynamics.

Total Reported Debt & Leases

The total reported debt and leases initially decreased from 4,683,658 thousand US dollars in 2018 to 4,479,857 thousand US dollars in 2019. Subsequently, it increased to 5,376,085 thousand US dollars by 2021, before slightly declining to 5,117,981 thousand US dollars in 2022. This indicates a modest fluctuation with an overall upward movement in debt and lease obligations over the observed period.

Total Stockholders’ Equity

The stockholders’ equity displayed a steady and robust growth trend throughout the five years. It more than doubled, rising from 1,398,721 thousand US dollars in 2018 to 3,299,544 thousand US dollars in 2022. This consistent increase suggests ongoing retained earnings and possibly additional capital contributions, contributing to strengthening the company's net asset base.

Invested Capital

Invested capital exhibited an upward trajectory across the period, increasing from 6,545,593 thousand US dollars in 2018 to 8,759,552 thousand US dollars in 2022. The growth was consistent year-over-year, indicating a steady expansion in the resources committed to the company's operations, funded by both debt and equity.

Overall, the company’s financial structure appears to have been progressively strengthened through increased equity and incremental invested capital. While total debt and leases showed some variability, the level remained elevated at the end of the period relative to the beginning, which alongside rising equity, suggests a balanced approach to financing growth and operations. The increasing invested capital underscores an expanding asset base supporting the business activities.

The economic spread ratio exhibited a generally positive trend over the observed period. While fluctuations occurred, the ratio demonstrated an overall increase from 2018 to 2022. This suggests an improving ability to generate returns exceeding the cost of capital.

Economic Spread Ratio

In 2018, the economic spread ratio stood at 11.64%. A decrease was noted in 2019, falling to 9.94%, representing the lowest value within the analyzed timeframe. Subsequent years saw recovery, with the ratio reaching 10.63% in 2020 and 10.22% in 2021. The most significant increase occurred between 2021 and 2022, with the ratio climbing to 11.97%, surpassing the initial 2018 value.

Economic profit increased consistently throughout the period, rising from US$761,721 thousand in 2018 to US$1,048,669 thousand in 2022. Invested capital also increased, though at a varying rate, moving from US$6,545,593 thousand in 2018 to US$8,759,552 thousand in 2022. The concurrent increase in both economic profit and invested capital supports the observed upward trend in the economic spread ratio.

Relationship between Economic Profit and Invested Capital

The growth in economic profit outpaced the growth in invested capital, particularly between 2021 and 2022. This differential contributed to the improvement in the economic spread ratio, indicating enhanced efficiency in capital utilization. The initial dip in the economic spread ratio in 2019 coincided with a larger decrease in economic profit relative to the increase in invested capital.

The observed trend suggests a strengthening financial performance in terms of value creation. The company appears to be becoming more effective at deploying capital to generate profits that exceed its cost of capital.

The economic profit margin exhibited a generally positive trend over the observed five-year period. While fluctuations occurred, the metric demonstrated an overall increase from 2018 to 2022. Economic profit itself also increased consistently throughout the period.

Economic Profit Margin

In 2018, the economic profit margin stood at 9.78%. A decrease was noted in 2019, with the margin declining to 8.35%. The following year, 2020, saw a recovery to 9.81%, slightly exceeding the 2018 level. The margin remained relatively stable in 2021 at 9.72%. A further increase was observed in 2022, reaching 10.06%, representing the highest value within the analyzed timeframe.

Economic Profit

Economic profit increased each year. Starting at US$761,721 thousand in 2018, it decreased to US$666,514 thousand in 2019. Subsequent years showed consistent growth, reaching US$799,135 thousand in 2020, US$871,855 thousand in 2021, and culminating in US$1,048,669 thousand in 2022.

Relationship between Net Sales and Economic Profit Margin

Net sales increased steadily throughout the period, from US$7,791,069 thousand in 2018 to US$10,419,294 thousand in 2022. The increase in economic profit margin, despite the growth in net sales, suggests improving operational efficiency and profitability. The largest increase in net sales occurred between 2021 and 2022, coinciding with the largest increase in economic profit.

The observed trends indicate a strengthening financial performance, as evidenced by both the increasing economic profit and the generally improving economic profit margin. The dip in 2019 warrants further investigation, but the subsequent recovery and continued growth suggest effective management of profitability alongside revenue expansion.